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SEBI move to regulate PN pays

MUMBAI: The final set of regulations announced by the capital market regulator on Oversees Derivative Instruments (ODIs), particularly on Participatory Notes (PNs), would give a sigh of relief to the financial markets and its regulators. On the one hand, the Reserve Bank of India’s (RBI) perception was financial stability, on the other, it was market stability for the Securities and Exchange Board of India (SEBI) while reigning on PNs. The decision on these instruments will give a cushion to the RBI while reviewing its annual policy on October 30.

While the objective of the RBI is to provide financial stability and growth, SEBI’s aim is to give the market long-term stability and growth by banning the entry of hot money into the Indian markets, said Prakash Subramanian, Managing Director and Regional Head, South Asia Capital Markets, Standard Chartered Bank.

Participatory Note (PN) is a derivative instrument issued by foreign institutional investors (FIIs) to market participants who do not wish to reveal their identities or are not registered with the Indian regulator.

It’s a good long-term move by the SEBI, said Vikram Kotak, Chief Investment Officer, Birla Sun Life Insurance.

The PN issue first cropped up in 2004, when the regulatory authorities found that Rs. 24,000 crore had entered the market through the PN route. A similar situation was noted during the stock market boom of 2000. The investigations into the Ketan Parekh-led stock market scam uncovered the fact that around $2 billion had been brought in and taken out of the country through Overseas Corporate Bodies (OCBs) registered in Mauritius. However, in the aftermath of the scam, the RBI had banned OCBs from investing in the stock market.

Surging inflows have been a big challenge for the RBI, which was further accelerated with the huge inflows into the stock market.

With the regulation on PNs, a long standing concern of the RBI was resolved by curtailing the entry of hot money into the system and arresting a sharp appreciation of the rupee.

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